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Dems, GOP Prepare Rival Debt Plans

House Speaker Boehner pushes two-step extension of debt limit.

Republicans and Democrats prepared dueling plans for raising the U.S. debt ceiling, unable to break a partisan stalemate over how to tackle the nation’s $14.3 trillion debt and quell market concerns about a potential default Aug. 2.

House Speaker John Boehner of Ohio told fellow Republicans he was determined to force action on a two-step debt-limit extension that would provide a roughly $1 trillion, shorter-term increase than President Barack Obama has requested, defying a veto threat and the administration’s warnings of dire economic consequences. He aimed to unveil his plan as early as today, when he was to update Republicans in a closed-door meeting in the Capitol.

The Senate’s top Democrat Harry Reid, meanwhile, readied his own proposal, which would hand Obama the full $2.4 trillion in additional borrowing authority he has requested -- enough to last through the 2012 elections --tied to a $2.7 trillion package of spending cuts that would leave Medicare and Medicaid untouched, according to a Senate Democratic aide.

U.S. stock futures and Treasuries slid in London as the lack of an agreement on raising the federal debt limit intensified concern of a default. The dollar weakened against yen and Swiss franc.

“From the markets’ point of view, a two-stage plan is a non-starter because we now know it is amateur hour on Capitol Hill and we don’t want to be painted in this corner again,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies & Co.

Downgrade Risk“There is significant risk of a downgrade with a deal that ties further cuts to another vote only a few months down the road given the significant resistance to do the right thing now,” Cooper said.

Treasuries fell after Mohamed A. El-Erian, whose Pacific Investment Management Co. runs the world’s biggest bond fund, said the U.S. may lose its AAA debt rating even if lawmakers reach a plan to avoid a default.

Ten-year yields rose two basis points to 2.98 percent as of 8:48 a.m. in London, according to Bloomberg Bond Trader pricing. The yield increased six basis points last week. It is still below the 10-year average of 4.06 percent.

“In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” El-Erian, the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco, wrote in an e-mail.

No Clear PathThe collapse July 22 of the quest by Obama and Boehner for a deal to slice as much as $4 trillion from the long-term debt through overhauls of entitlement programs and the tax code left all sides staring at a crisis with no clear path forward and little time to spare.

Obama met in the Oval Office yesterday with Reid, of Nevada, and House Democratic Leader Nancy Pelosi of California and all three reaffirmed their opposition to a short-term debt- limit increase.

Boehner told Republicans in a conference call yesterday that no one is willing to default on the full faith and credit of the U.S., according to a person familiar with the conversation who described it on condition of anonymity.

Damage LimitationTreasury Secretary Timothy Geithner said there was no other option than raising the debt ceiling. “The only way to limit the damage to the American people that would come from Congress failing to act is for Congress to act to raise the debt limit,” Geithner said on ABC’s “This Week.” Congress is “going to pass the debt limit increase. That’s what they’re going to do.”

Congressional leaders were battling the calendar to do so. Boehner has told Republicans privately that the House would probably need to act on a debt-ceiling measure by July 27 to allow time to pass it, send it to the Senate, where procedural tactics could stall it for days, and get it cleared for Obama’s signature in time to meet the Aug. 2 deadline. That would mean introducing a bill today to comply with House rules that require legislation to be publicly available for three days before it comes up for a vote.

Reid said “talks broke down over Republicans’ continued insistence on a short-term raise of the debt ceiling.”

Such a measure wouldn’t provide certainty for financial markets “and is therefore a non-starter in the Senate and with the president,” Reid said in a statement.

Terms of DealA Republican aide involved in the talks said Reid had been open to Boehner’s approach -- backed by Senate Minority Leader Mitch McConnell of Kentucky -- of providing a short-term borrowing increase accompanied by a greater amount of spending cuts, then charging a committee to find long-term debt savings before the rest of the increase could be considered. Reid presented it to Obama at the White House and the president would not agree, the aide said.

The conflict carried political peril for both parties. Boehner is laying the groundwork for the task of corralling Republicans -- including the Tea Party-supported freshmen who swept him into power in campaigns that spotlighted their zeal for spending cuts -- to back a debt-ceiling increase that is likely to contain far smaller reductions than they favor.

The coming debt-limit showdown was shaping up as a test of Republican solidarity, and Boehner urged his rank-and-file during yesterday’s afternoon conference call to stick together to maximize their leverage against Obama, even though the plan might require some of them to make sacrifices.

‘Some Leeway’“It’s not a game of chicken,” Representative Bill Huizenga, a Michigan Republican, said in an interview following the call. “People are looking for the speaker to come back with something significant. There is an agreement to be found, we just haven’t found it yet. People are willing to give the speaker some leeway.”

Obama was consigned largely to the sidelines as Boehner, Reid and their counterparts in the opposing parties struggled to assess what could pass the House and Senate. Recent polls have shown that the public is on the president’s side in the debt- limit debate, trusting him more than Republicans and favoring his call for increasing taxes on the wealthy while opposing the spending cuts Republicans have demanded.

Voter ViewsA CNN/Opinion Research Poll conducted July 18-20 found that 52 percent believe Obama has behaved responsibly in the debt ceiling talks, compared with 46 percent who do not. Two-thirds said Republicans had not. In the poll of 1,009 adults, 51 percent said they’d blame Republicans if the debt ceiling were not raised, compared with 30 percent who would blame Obama. It had a margin of error of plus or minus 3 percentage points.

Yet the president also has much at stake in the event of a debt-limit disaster at a time when the public is already unhappy with his performance and handling of the economy. According to Gallup, 43 percent approve of the job Obama is doing while 49 percent disapprove.

Boehner told Republicans on the conference call that they needed to pull together to block the president from obtaining the $2.4 trillion debt-ceiling increase all at once, without any guarantees of spending cuts. He is considering a plan that would provide an immediate, stopgap borrowing boost of about $1 trillion tied to the same amount of spending cuts, and future votes on further spending reductions tied to the remainder of the debt-limit increase.

Market ReactionsObama would veto such a measure, White House Chief of Staff Bill Daley said in an interview on NBC’s “Meet the Press,” warning that “markets around the world” would react negatively.

“We’ve got to get past this debt-ceiling vote,” Daley said. “It’s time to get some certainty.”

Boehner said on the “Fox News Sunday” program that while he’d prefer a compromise package, his party was “prepared to move on our own” if that proved impossible.

“There will be a two-stage process,” Boehner said on Fox. “This is about what is doable at the 11th hour.”

The dollar declined 0.4 percent to 78.25 yen as of 9 a.m. in London from 78.54 yen on July 22. Against the Swiss franc, it weakened to 80.82 centimes from 81.92 centimes. The U.S. currency strengthened against the euro, rising 0.1 percent to $1.4352.

Bloomberg News

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